Settlement agreement

They are the same thing essentially. In July 2013 the government introduced some changes including pre-termination negotiations and at the same time changed the name from compromise agreement to settlement agreement.

It means that any discussions or negotiations between the parties are confidential and “off the record” and cannot usually be used against the other party, if the negotiations break down and a claim is brought in the court or tribunal. An employer may also commence what is known as a “protected conversation” which is similar. If the employee has been placed under undue pressure or there is no genuine dispute, the discussions may not be “without prejudice” or protected from disclosure. Care should be taken in what is said in such communications, and you should seek specialist legal advice.

There is no set method or formula to calculate what you should get under a settlement agreement, however, at a minimum you should receive any contractual payments (i.e. salary and benefits to termination, any accrued but untaken holiday at termination, notice pay, any contractual bonus/commission/shares etc).  In addition to this it is usual for the employer to offer a payment as compensation for loss of office. 

If the reason for termination is redundancy this should include any entitlement to a statutory redundancy payment.  The first £30,000 of any compensation payment should be able to be paid tax free so long as it is not made up of any contractual elements.  Employers generally offer between 1 to 6 months salary on top of the contractual entitlements.

Payments of up to £30,000, which are not made up of any notice or other contractual elements, can often be paid without any deduction of tax. However, we strongly recommend you take specialist advice from an accountant on the tax treatment of lump sums received , particularly in complex transactions involving, for instance a transfer or sale of shares, alongside leaving employment. At Tees we will work with your accountants and can provide you with specialists to assist you.

It is usual for an employer to offer a contribution towards legal fees but there is no legal requirement for them to do so. Contributions are usually between £350 and £750 plus VAT but it depends on the employer.  We try to stick within the contribution offered by the employer where possible but if you require us to negotiate with the employer, costs could rise above this and unless the employer agrees to increase their contribution, you would be responsible for any costs in excess of the contribution. 

For the settlement agreement to be legally binding the employee must take independent legal advice so that they understand the terms of the agreement and the implications of signing it.  Once it is signed by both parties it is open (that is, no longer "off the record" as part of a without prejudice negotiation) and binding.

There are certain formalities to be met, regulated by law under the Employment Rights Act. In summary, there will be some essential terms relating to the employee signing away their rights. In addition, the agreement will commonly include terms around any compensation payment to be made, agreed reference and any post-termination restrictions. Terms around confidentiality are also common but subject to limitations, for instance that employees cannot be prevented from making a “whistleblowing” protected disclosure. 

Usually it is the employer who takes the first step in offering a settlement agreement to an employee, however it is possible to request the same from your employer.  Any discussions with the employer would need to be on a without prejudice basis and would usually be termed a “protected conversation”.